What to say if your client asks to cancel their business interruption coverage

I arrived back into Australia on Saturday, after being in the UK and France for the past 3 weeks. It is great to be back home and, just as I did in the UK, I am taking a very risk averse approach to the issue and am self isolating completely, away from the rest of my family. I am showing no signs of having contracted the virus, so far.

Whilst away, I continued to answer blog questions as usual. At the same time, I was watching with interest the way Europe was dealing with the crisis, realising that what was occurring there, Australia would follow suit.

The latest batch of questions, fall into two main categories. I address the first now and will tackle the second shortly. As an example of the first one, I reproduce this question from a broker:

Hi Allan ,

Hope you’re keeping well through these historic times.

Do you have a view on what insurance brokers should be advising clients to do with their BI cover during the close-down period for the hospitality industry announced last night?

Insureds will be looking to minimise all non-essential costs during the shutdown period, and my question boils down to whether there is a BI [business interruption] loss that can be paid during the shut down period. To clarify my question, if a fire happens during shutdown how would a loss be assessed and paid? 

Any comments or advice you have for the broking industry and insureds surrounding continuing BI cover during shutdown period is very much appreciated.

Regards

Anthony [surname and email withheld]

I replied as follows:

Good morning Anthony,

My strong advice is to retain the business interruption coverage. We do not know how long the closures will entail, and the way the business interruption policy works is that the loss would be paid based on the standard turnover (typically defined as: “The Turnover during that period in the 12 months immediately before the date of the Damage which corresponds with the Indemnity Period.” of the business, with adjustments for the trend and special circumstances that affect the business but for the loss.

Clearly, COVID-19 is a special circumstance and if the insured were not permitted to operate during that period, then their claim would be reduced accordingly. However, let us say the fire causes damage, that it takes six months to reinstate this, and the COVID-19 shut were only to last a month, then the client would miss out on 5 months of much needed insured gross profit paid by the insurer. I would expect after being locked up for a month, the public would be breaking the doors down of cafés, restaurants, pubs etc. to put the month behind them, and to catch up with their social networks.

Fires, storms, burglaries, etc. will not stop just because we are in a shut down situation.

A much better strategy, is to use the premium adjustments clause and at renewal, provide a declaration of the actual gross profit of the business and seek a return of premium if warranted.

I appreciate this is a very worrying time for all of us with both our health and financial security at risk. However, we all need to act prudently, hope for the best but plan and insure for the worst.

Regards,

Allan  

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The other issue to keep in mind, of course, is that if an insured’s premises are going to be unoccupied for a period longer than the particular policy would allow, then the insurer ought to be notified.

In this hour of an international emergency, I would like to think that the general insurance industry will do their part and not impose higher terms on any insured forced to close.